Some Reflections On The Crisis And Its Implications For Managing Financial Risk by Stephen Ross
The recent global financial meltdown which started with the US subprime mortgage crisis is considered by many to be the worst financial crisis since the Great Depression of the 1930s. The causes of this crisis are still being debated by policy makers, practitioners, and academic researchers. Some believe regulatory failures are the root cause, while others stress that leverage, derivatives, credit ratings, and so on are to blame. Still others blame it on China, which has too much savings to loan to the United States government.
In the public lecture addressed by Professor Stephen A. Ross at the NUS Business School, he shared his opinion on what caused the crisis, and its implication for managing financial risk. Professor Ross commented that the root causes of the recent financial crisis lie more in the political economy than in financial economics. He believed that the principal issues, such as mandating adequate bank capital, remain unaddressed and hence, there will be more crises. He also stressed that diversification is necessary, but not sufficient to control for risks. He suggested that derivatives weren't the disease that caused the crisis, rather a part of the cure. The interest that the public has on this topic was well reflected by the meaningful discussion Professor Ross had after his lecture with the over 100 people that were in attendance. The discussion topics ranged from questions on leadership, the failure of theoretical models, the worth of rating agencies, and the possibility of a future financial crisis coming from China. The lecture ended with a short video from 1979 wherein the late Professor Milton Friedman delivers a sound thumping to talk show host Phil Donahue. In the video, Mr. Friedman's take on financial and political self-interest is in line with Professor Ross`s opinion on the political economy as the root of the crisis. To avoid the next financial crisis, we must understand what caused the one from which we are now slowly emerging, and take action to avoid the same mistakes in the future. This was a very insightful lecture that helped us better understand some of the core issues that caused the recent financial crisis.
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NUS-Cornell Applied Research Forum in Asian Asset Management
CAMRI, in partnership with The Parker centre at the Johnson School at Cornell University, hosted the inaugural NUS-Cornell Applied Research Forum in Asian Asset Management. The Forum had a hybrid structure of plenary talks and roundtable panel discussions, focusing on the business of asset management in Asia: financial regulation, liquidity and risk management, the investment outlook and financial opportunities in Asia.
Speakers and panelists included Owen Thomas (CEO, Morgan Stanley Asia), Gerard Lee (CEO, Lion Global Investors), Anthony Neoh (Dean's Visiting Professor, NUS Business School), Prof Ming Huang (Cornell University), Peter Elston (Strategist, Aberdeen Asset Management), Daniel Chan (former Chief Executive Officer, Lion Global Investors), Veronica Eng (Partner and Chairman – Asia, Permira Advisers) Ho Han Ming (Partner and Head of Funds Practice, Clifford Chance), Nell Cady-Kruse (Chief Risk Officer, Wholesale Banking, Standard Chartered Bank), Sunil Sharma (Director, IMF-Singapore Regional Training Institute), James Cheng (Managing Director, Morgan Stanley), Richard Jerram (Head of Asian Economics, Macquarie Capital Securities), Stephen Diggle (Managing Partner, Artradis Fund Management), Wataru Ogihara (Chief Investment Officer, Nomura Asset Management), and Prof Joseph Cherian (CAMRI, NUS Business School).
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The Dollar and Global Investment by Marty Feldstein
"The US economy is worse than you think," so declared Professor Martin Feldstein, George F. Baker Professor of Economics at Harvard University, in a recent commentary in the Wall Street Journal.
At an industry luncheon forum organised by the Centre for Asset Management Research and Investments (CAMRI) at the NUS Business School on 7 July, Professor Feldstein delivered a talk on "The Dollar and Global Investment", where he examined whether the US dollar would continue to decline and how the behaviour of the dollar would affect the global economy and markets, especially those in Asia. Professor Feldstein opined that holding treasuries would not make sense in the current climate, and that investors should instead diversify into Euro- and Asian-denominated assets, the Euro sovereign debt crisis and Asia's overheating economies notwithstanding. While the current depreciation of the US dollar and the resulting competitiveness of US good and services were sure-fire ways to address the huge twin current account and trade deficits that the US was facing, Professor Feldstein observed that the dollar's depreciation against the currencies of the European Union, China, Singapore, and Korea, would lead to a deterioration of these latter countries' current account surpluses or deficits, which in turn would lead to the US experiencing a corresponding improvement in its current account deficit situation. Professor Feldstein also felt that China's policy towards higher domestic consumption would yield the right results, and that the interest rate differential between the US and higher-yielding, emerging currencies would narrow as US interest rates rise to make US dollar-denominated fixed assets more attractive in a depreciating environment. He was pessimistic on the outlook of the US economy in the intermediate term, despite the fact that market pundits have turned sanguine. He explained that there were too many structural headwinds facing the American economy, such as underwater housing, high unemployment, and rising energy prices. In fact, he put the odds of another US economic downturn in 2011/2012 as a one-third probability event. Professor Joseph Cherian, CAMRI Director and Professor of Finance, noted, "Marty's take on the US economy, US dollar and US dollar-denominated fixed assets was interesting and it generated a fruitful exchange of ideas among the 90-strong audience of senior financial leaders from asset management, banking, foundations, and corporates who attended the luncheon forum. We are grateful to Marty for being our guest speaker under CAMRI's Visiting Distinguished Scholars and Leaders Programme." The talk by Professor Feldstein is part of a series of talks and forums organised by CAMRI to serve as platforms for industry to exchange insights on the global investment outlook, research, policies and practices relating to asset management.
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Fifth Singapore International Conference on Finance
This is an international finance conference organized jointly by CAMRI and the Department of Finance, NUS Business School. The event brings together high quality papers on the Financial Crisis, Corporate Finance, Asset Pricing, Volatility, Behavioural Finance and Mutual Funds. The conference presents an excellent opportunity for practitioners and researchers in financial institutions and universities to discuss and exchange ideas on the latest developments in the field of finance.
The keynote speaker was Professor Charles Lee of Stanford University, who spoke on "Information Rules: How markets become efficient and why we should care."
The Best Paper Award, sponsored by CAMRI, was won by Jiekun Huang (National University of Singapore) and Meng Gao (National University of Singapore). They co-authored the paper "Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers" that was judged best by voting participants.
Student Consulting Practicum: Acorn Capital
Adding to the list of many student consulting practicum projected supervised at CAMRI, the Acorn Capital 2-semester Consulting Practicum project is currently being conducted over Semester 2 of AY 2010/11 and Semester 1 of AY 2011/12. This Melbourne-based firm's CP project involves performance attribution analysis with regards to investments in the Small cap and Micro cap primary and secondary markets, analyzing transaction and liquidity costs and its impact on alpha generation, as well as developing a systematic data screening process for the Australian Micro cap sector, which can potentially be extended to the Small cap / Micro cap sector across Asia (ex-Japan). The project included the students making a weeklong work-study trip to Acorn Capital's Melbourne head office during May of 2011.
Student Managed Fund at CAMRI
In order to be a leading educational research institution in asset management, CAMRI is commencing efforts to set up a Student Managed Fund using seed capital provided by a supportive private donor. We are aiming for more support from other generous donors who believe in training Singapore's next generation of equity research analysts and fund managers. The fund will be a low-risk, conservative equity fund that is hedged against adverse market movements. I.e., the fund will be close to market neutral, while targeting principal preservation and minimizing downside risk. Students, guided by CAMRI faculty and investment professionals, will manage real money, hence "learning-by-doing" via the hands-on experience in fund management. Such practical training will better prepare our graduating students for the demands of the investments, financial and wealth management industry.
Issuing Advice for Singaporean Investors: Issues with Share Issuers
by Jeff Pontiff, Professor of Finance, Boston College and Visiting Professor, Finance Department, NUS Business School
Most investors and investment managers, while rushing to focus on statistics for stock selection such as price-to-earnings ratios, ignore one of the most compelling statistics—the percentage change in the shares outstanding for the firm. This variable gives us valuable information about how aggressively a firm is issuing or repurchasing its own shares. Two recent papers published by Prof. Pontiff investigate whether share issuance can be effectively used to predict future stock return performance. The first paper focused on US stocks, while the second paper looked globally at 42 countries, including Singapore. Firms issue stock in many ways. The two most prominent ways are through a seasoned equity offering and through acquisition or merger, where the shares are used as currency. Shares are also issued through executive option grants or through the conversion of convertible preferred stock or convertible bonds. Shares are purchased through open market repurchases or self-tender offers. Why do firms issue or buyback stock? One reason is that they may think that their stock price is too high or too low, respectively. This explanation is supported by the long-run market response to share issuance. It is found that the percentage annual increase in firm's shares outstanding is a strong negative predictor of returns. The US paper shows that there is predictive ability over the following three years from the share issuance. The statistical confidence associated with this result is stronger than other characteristics that academics have found. The predictive ability of this variable is remarkable. In unpublished work, it has been shown that the performance can be improved and supplemented with similar measures. The predictive ability is long-lasting, which avoids the need to trade frequently. It exists for both large and small market capitalization stocks, as well as value and growth stocks. The global paper produces similar findings in other countries. The results are particularly strong in Singapore. In fact, out of the 42 countries considered in the study, Singapore ranks 6th in the magnitude of this share issuance effect. In a typical year, the number of shares outstanding changes for 58% of Singaporean firms. The moral of the story: If you hold stock in one of these companies, do you know if they are issuing or buying back shares?
On the Role of the State in Pension Plans and How Best to Achieve It
by Laurent Lassalvy, Visiting Research Fellow, CAMRI
How senior citizens are able to make ends meet is too important an issue for society, especially for the population ageing nations, to be left to the full discretion of each household. As such, the majority of governments are heavily involved in the retirement savings and benefits process, through state pension systems, compulsory retirement savings, benefit programs for retirees and tax incentives amongst others. In this research we explore the state's optimal role in the pension system and how best to achieve the public objectives. Society benefits if all senior citizens receive a basic living pension, and a purely private pension system would not take into account these externalities; hence it is beneficial for governments to create a compulsory public pension system. A government-guaranteed public pension fund should have three main objectives: guarantee a minimum standard-of-living for all retired citizens, be self-funded and promote self-reliance, i.e. each citizen's pension distributions are funded from his own past pension contributions. A satisfactory basic living retirement income should be life-long and guarantee a stable standard-of-living; it can be achieved with a retirement life annuity paying a fixed percentage of per capita consumption (Merton (1983)). Consumption-indexing maintains one's relative standard-of-living; whereas a focus on the cost-of-living and the use of inflation-indexing could result in significant divergence between the quality of life of retirees and of the working population. An acceptable level for the basic living public pension distribution could be a consumption-indexed life annuity which provides each retiree with, say, 50% of the national per capita consumption. Any additional pension savings and supplemental pension distributions would be optional and managed by the private sector. To achieve universal coverage, decent pensions and reduced costs, choice has to be sacrificed; public pension contributions should be compulsory, their level determined automatically and transparently by the public pension fund, and they should be immediately used to purchase consumption-linked life annuities. Compulsory contributions and a unique investment product address the adverse selection and free-rider conundrums. In addition to ensuring self-funding and self-reliance of the public pension system, individuals' contributions have to be reasonable and steady such that disposable income is sufficient and stable for all workers, including low-earners. We present several complementary mechanisms which can be used to smooth the required contribution stream. As a corollary, we propose the government issues consumption-indexed bonds to reduce the public pension fund's asset-liability mismatch, and improve the consumption-indexed annuity price discovery process. Consumption-linked government bonds should be issued across all maturities and sold both to the private sector and to the public pension fund. This would leave the public pension fund exposed solely to population-level longevity risk. Implications arising from home ownership and health care needs are also discussed. Housing expenditures should be included in the public pension system but with dedicated contributions and life annuities such that the home ownership status can be taken into account. Conversely, health care needs are too volatile and unpredictable to be handled within the public pension system. Rather, as is practiced in many countries, including Singapore via its Medisave/MediShield program, we argue it should be financed and implemented through a separate, basic health care insurance scheme. This paper is a part of the CAMRI Life-cycle Saving and Investing in Asia Research Series.
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Worry-free Inflation-Indexing for Sovereigns: How Governments can Effectively Deliver Inflation-Indexed Returns to Their Citizens and Retirees
by Zvi Bodie (Boston University), Joseph Cherian (CAMRI) and Wee Kang Chua (CAMRI)
We have presented our public policy paper, "Worry-free Inflation-indexing for Sovereigns", which outlines methods by which smaller sovereigns can provide inflation-indexed retirement products to their citizens and retirees, at the Conference on Financial Education and Consumer Financial Protection in Boston jointly organized by Boston University, U.S. Federal Reserve Bank of Boston and the Chartered Financial Analyst (CFA) Institute on May 25 2011, as well as the 22nd Annual East Asian Seminar on Economics organized by the U.S. National Bureau of Economic Research (NBER) in Beijing on June 23 2011. On May 20 2011, we had also posted the paper on SSRN, the premier global online preprint news network and database for financial research. As of Aug 1 2011, this paper had reached the top weekly downloads in 4 eJournal categories (Price level; Inflation; Deflation, Income Policy, Index Numbers & Aggregation, as well as Econometric & Statistical Methods), the top 5 weekly downloads in 4 eJournals and the top 10 weekly downloads in 11 SSRN eJournals, with over 50 downloads of the paper recorded. We are pleased that our applied research, which is a part of the CAMRI Life-cycle Saving and Investing in Asia Research Series is gaining traction globally.
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As part of the CAMRI Student Managed Fund initiative, and pending the necessary administrative and academic approvals, CAMRI is proposing that students prepare themselves for a career in equity analysis and fund management by taking the trio of BBA pre-Honors and Honors classes, "Financial Modeling", "Applied Portfolio Management Techniques", and "Securities Analysis & Valuation for Fund Management" offered by Professors Lee Hon Sing, Richard Yeh, and Joseph Cherian, respectively. These courses will be preceded by the regular Accounting and Investments modules, which should be completed by Semester 1 of Year 3 in the student's course of study within the BBA Honors program. The plan is for students who have completed the Investments, Financial Modeling, and the Securities Analysis & Fund Management modules will go through a rigorous multi-stage short-listing & interview selection process before being invited to attend the PM modules and participate in the activities of the CAMRI Student Managed Fund. This approach is currently practiced in the best business schools in the US who also have student managed funds in their programs.
CAMRI Luncheon Talk by Professor Yacine Aït-Sahalia (Princeton):
Portfolio and Risk Management When All Asset Classes Can Fail Together
22 August 2011
Professor Ait-Sahalia of Princeton University will talk about how adverse shocks to stock markets can propagate systematically across the world, with a shock in one region of the world causing an increase in the likelihood of a different shock in another region of the world. To capture this effect, Professor Ait-Sahalia introduces an easily understandable model for stock price returns with mutually exciting jumps known as "Hawkes processes". In such a model, a jump or shock in one region of the world, or one segment of the market, increases the intensity of jumps (or shocks) occurring both in the same region (he refers to this as "self-excitation") as well as in other regions (referred to as "cross-excitation"). His model generates the type of jump clustering that is observed in practice, as well as provides strong evidence for self-excitation both in the US market and in other world markets. Furthermore, he find that US jumps tend to get reflected quickly in most other markets, while the reverse transmission is much less pronounced. Implications from the model for measuring market stress, for risk management, and for making optimal portfolio choice decisions are also discussed.
IMAS Research Grant
CAMRI has created and will be disseminating an applied finance research program in the area of asset management through both direct and indirect support of NUS Business School's faculty. Based on a recent gift from the Investment Management Association of Singapore (IMAS), which was provided in order to support applied finance research at CAMRI that will broadly benefit the investment management industry in Singapore. CAMRI is looking to fund applied finance research proposals of up to S$15,000 in the areas of Delegated Portfolio Management (unit trusts, mutual funds, hedge funds, private equity); Commodities, Derivatives, Asset Pricing (Empirical & Theory); Financial Market Microstructure, Market Design, Trading Strategies; and Market Efficiency, Behavioral Finance. This could include topics in the area of life-cycle saving and investing in Singapore in particular, and Asia in general, especially in the context of retirement planning, inflation-indexed products, etc. These research grants are meant to stimulate original and fundamental applied finance research thinking in the area of asset management; improve the Singapore investment management industry's knowledge and understanding of asset management and related issues; and disseminate this knowledge to a wider academic and practitioner audience, say for example, at one of CAMRI's Applied Research Forums.
Stop Press: We are pleased to announce we had 10 excellent submissions of proposals for the 2011 CAMRI Applied Finance Research Grants funded by IMAS. The proposal, “Short-term Speculators and Market Efficiency: A Study of the Singapore Private Real Estate Market” by Assistant Professor Qian Wenlan of the Finance Department was adjudged the winner this year by the Research Selection Committee.
3rd Wee Cho Yaw Singapore-China Finance and Banking Forum, Shanghai, Private Equity Forum: The Singapore-China Axis
September 2, 2011
In this "Private Equity Forum: The Singapore-China Axis", leading experts from China and Singapore will examine China's economic and regulatory environment, especially in the context of the investment and regulatory architecture in China's private equity industry. Despite concerns about soaring inflation, unbridled growth and changing demographic trends, China's underlying economy remains robust. It is the world's second largest economy, and a global powerhouse in terms of growth and size. China has a seemingly limitless domestic market, and companies can record impressive growth without crossing borders. Company acquisitions and takeovers have also increased in recent years, and opportunities abound for private equity and institutional funds. The search could be arduous but rewards handsome for those with the right partnerships. However danger lurks for the uninitiated. The regulatory and corporate governance frameworks need to be well understood by companies and private equity funds seeking to navigate in China's increasingly complex economy with its various economic, social and political interdependencies.
We have just posted a CAMRI Introduction Video about our Centre so as to give readers and viewers a better understanding of CAMRI's mission and purpose, as well as the quality and rigour of our resources. We express our appreciation to all the generous individuals and institutions who have supported us and our endeavors in the past and present, so as to bring us to this stage, and appeal to others who share our vision and mission to help sustain the Centre for future generations.
NUS Asian MBA
Stock Pitch Competition
The annual NUS Asian MBA Stock Pitch Competition hosted by the Centre for Asset Management Research and Investments (CAMRI) provides a forum for top MBA students in Asia to compete and showcase their stock-pricing skills in front of a panel of distinguished judges from the investment industry. The intense competition is designed to replicate the fast-paced, demanding experience of fundamental analysts and asset managers in the real world. 10 out of 14 applicants were selected for competition. Indian School of Business, Hyderabad emerged as the Champion.
GIC Essay Prize 2010/2011
The Government of Singapore Investment Corporation (GIC) challenged undergraduates to tackle the topic "Post-Financial Crisis: Key Lessons, Opportunities and Recommendations for Asia's Institutional Investors" and compete in the GIC Essay Prize 2010/2011. Administered by CAMRI, the challenge, introduced in August 2010, aims to increase students' interest in institutional asset management. There were many outstanding submissions among the 30 odd entries, and the results will be announced soon.
Professor Yacine Aït-Sahalia
Otto A. Hack 1903 Professor of Finance and Economics, and Director of Bendheim Centre for Finance Princeton University
Visit time: August 2011
Profesor Anthony Neoh
QC, SC, JP, Hong Kong Bar and Dean's Visiting Professor, NUS Business School
Visit time: March & September 2011
Professor Ming Huang
Professor of Finance, Cornell University
Visit time: March & September 2011
Professor Robert A. Jarrow
Ronald P. and Susan E. Lynch Professor of Investment Management Professor of Finance and Economics, Cornell University
Visit time: 2012
Professor Roni A. Michaely
Rudd Family Professor of Management Professor of Finance, Cornell University
Visit time: April 2012
Professor Martin Feldstein
George F. Baker Professor of Economics, Harvard University Chairman of President Ronald Reagan's Council of Economic Advisers, and former President of the National Bureau of Economic Research
Visit time: July 2011
Professor Stephen A. Ross
Franco Modigliani Professor of Financial Economics Professor of Finance, MIT Sloan School of Management
Visit time: March 2011